German economy recovering, investment clouded: Bundesbank

The Bundesbank forecast on Monday that the German economy, Europe's biggest, will return to "normal, steady growth" in the second half of 2013, but sounded cautious about investment.

"In the second half of 2013, economic growth in Germany is likely to return to normal and steady rates," the German central bank wrote in its August monthly report.

Last week, official statistics showed that German gross domestic product (GDP) expanded by a stronger-than-expected 0.7 percent in the second quarter following zero growth in the first quarter.

The data indicated that growth was driven mainly by domestic demand, with consumer spending and public expenditure both on the rise and investment was also up on the previous quarter.

But in its report, the Bundesbank was doubtful whether there would a noticeable revival in investment.

Additional demand for German companies' products was largely coming from non-eurozone countries "where firms are tending to expand their production capacities".

"This is curtailing fixed capital formation at domestic production sites and the growth of exports to third countries," the Bundesbank said.

Companies' investment in machinery and equipment, which had stabilised at a low level at the beginning of 2013 following a significant fall in 2012, "gathered little momentum in the spring despite the sharp increase in economic output," it said.

And capital formation in the domestic corporate sector also remained largely subdued despite enterprises having ample own funds and access to cheap sources of funding.

"This was probably mainly due to the long- standing gloomy sales outlook, above all in the euro area, and the ongoing uncertainty about the economic policy situation in view of the debt crisis," it said.

"Domestic investment is unlikely to pick up discernibly until there is a long-term improvement in the economic prospects for Germany's neighbours and the uncertainty surrounding economic policy is further checked through suitable measures to combat the debt crisis in the euro area," the Bundesbank said.

The central bank also discussed the new communication policy of the European Central Bank, which has decided to give so-called "forward guidance" by saying that its interest rates were likely to remain at their current levels or even lower for the foreseeable future.

But the Bundesbank insisted that the policy did not mean the ECB was tying its hands to a set level of interest rates, should unexpected developments in inflation emerge.

"The ECB's governing council is not tied. If, in future, the price pressures are higher than currently assumed, then an increase in interest rates is not ruled out," the Bundesbank wrote.